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Artesanias Hacienda Real S.A. DE C.V. v. North Mill Capital, LLC

United States District Court, E.D. Pennsylvania

August 8, 2019



          EDWARD G. SMITH, J.

         This case arises from the appellees' alleged participation in a scheme to loot the assets of an indebted company, to which one appellee provided financing and the other legal services, so that the company was unable to satisfy its debts to the appellant. The litigation around this purported scheme has a nearly four-year history, including proceedings before this court, the bankruptcy court, and the court of appeals.

         At issue here is the appellant's appeal of the bankruptcy court's decision dismissing its claims for lack of standing. The appellant argues first that the bankruptcy court erred in holding that core jurisdiction existed over the case, and second that the bankruptcy court ignored evidence showing it has standing to assert the claims at issue. Specifically, the appellant points to its agreement with the bankruptcy trustee-encompassed in an order a different bankruptcy court judge entered-which it claims establishes that the trustee relinquished standing over the claims. Alternatively, the appellant argues that its claims are particularized to it, and thus are not claims the trustee ever had standing to bring, a position the trustee also adopted in an affidavit. The appellees respond that the bankruptcy court's decision was proper in all respects, because (1) as this court previously held in referring the case to the bankruptcy court, bankruptcy jurisdiction exists over the claims, and (2) the appellant alleges a generalized harm that, even if true, all creditors would have suffered.

         After a thorough review of the pleadings, the bankruptcy court's opinion dismissing the action, the parties' briefing, and the relevant jurisprudence, the court concludes that “related to, ” but not core, bankruptcy jurisdiction exists over the appellant's claims, because although the claims do not arise under the bankruptcy code or exist only in the bankruptcy context, their outcome could nevertheless have a conceivable effect on the estate. The court has therefore treated the bankruptcy court's decision as a recommendation and conducted a plenary review of the appellant's standing to assert the claims. The court holds that the bankruptcy court's standing decision was correct, because the asserted causes of actions belonged to the estate and therefore accrued to the trustee when the debtor filed for bankruptcy. This is true as a matter of law, and the trustee's conclusion to the contrary therefore does not mandate a different result. Moreover, although a trustee may relinquish certain claims to a creditor under limited circumstances, those circumstances are not present here and would only allow a creditor to seek damages on behalf of the estate in any event. Accordingly, the court will affirm the decision of the bankruptcy court.


         The appellant, Artesanias Hacienda Real S.A. de C.V. (“AHR”), filed a complaint against Wilton Armetale, Inc. (“Wilton” or the “Debtor”) and its sole shareholder, director, and officer, Ivan Jeffery (“Jeffery” or the “Fiduciary”), on November 27, 2015, seeking a money judgment for wares it sold to Wilton for which it had not been paid. Artesanias Hacienda Real S.A. DE C.V. v. Wilton Armetale, Inc., et al., Civ. A. No. 15-6350, Doc. No. 1. On April 6, 2016, the court entered summary judgment in favor of AHR and against Wilton in the amount of $900, 658.17, plus prejudgment interest.[1] Artesanias Hacienda Real S.A. DE C.V. v. Wilton Armetale, Inc., et al., Civ. A. No. 15-6350, Doc. No. 20. On April 29, 2016, this court entered summary judgment in favor of AHR and against Jeffery in the amount of $900, 658.17, plus interest, and ordered Jeffery to deliver to AHR's counsel all shares of stock in Wilton.[2] Artesanias Hacienda Real S.A. DE C.V. v. Wilton Armetale, Inc., et al., Civ. A. No. 15-6350, Doc. No. 25. AHR recorded the April 6, 2016 order with the Lancaster County Prothonotary as a judgment lien against Wilton's Mt. Joy real estate. Amended Opening Appellate Brief of Plaintiff/Appellant Artesanias Hacienda Real S.A. de C.V. (“Am. AHR Br.”) at 8, Doc. No. 14.[3]

         Per the court's April 29, 2016 order, Jeffery delivered his Wilton shares to AHR's affiliate, following which the affiliate terminated Jeffery's positions with the company, installed new management, and contacted one of the appellees in this action, Leisawitz Heller-counsel to both Wilton and Jeffery-to waive attorney client privilege and demand the documents which AHR believed were necessary to enforce its lien. Id. at 8-9. AHR alleges that during the discovery that followed, it uncovered evidence that Jeffery, in his capacity as Wilton's sole director,

signed [an] agreement to sell all Wilton's non-real estate assets for only $725, 000 to North Mill [Capital LLC's] hand-picked liquidator Gordon Brothers, and for payment of all that $725, 000 directly to North Mill, thereby leaving Wilton without funds or resources to protect its Mt. Joy real estate (which had been appraised as having an ‘as is' fair market value of $895, 000)[.]

Id. at 9-10 (internal citations omitted). AHR further alleges that Leisawitz Heller, as Wilton and Jeffery's counsel, arranged for the other appellee in this action, North Mill Capital, LLC (“North Mill”), to sign a separate agreement providing that Jeffery would receive a bribe, equal to 20% of the net proceeds of the real estate transaction, in exchange for approving the sale. Id. at 10. North Mill, again with Leisawitz Heller's assistance, then allegedly filed inflated confessions of judgment against and sought to foreclose on Wilton's real estate. Id. at 10-11. AHR asserts that but for the purported scheme, AHR could “have enforced its recorded judgment lien and so recovered the judgment owed [AHR] from [the] sale of Wilton's real estate.” Id. at 12.

         AHR filed a complaint regarding the above allegations against North Mill and Leisawitz Heller in a separate action on August 2, 2016. Artesanias Hacienda Real S.A. de CV v. North Mill Capital, LLC, et al., Civ. A. No. 16-4197, Doc. No. 1. The next month, Wilton filed for bankruptcy. Am. AHR Br. at 13. AHR filed an amended complaint on January 3, 2017, asserting causes of action for aiding and abetting breach of fiduciary duties, conspiracy to breach fiduciary duties, conspiracy for fraudulent transfer, and conspiracy to engage in the commercially unreasonable disposition of assets. First Am. Compl. at ¶¶ 66-147, Artesanias Hacienda Real S.A. de CV v. North Mill Capital, LLC, et al., Civ. A. No. 16-4197, Doc. No. 38.[4]

         After receiving supplemental briefing from the parties on whether the action should be resolved independently of Wilton's bankruptcy proceedings, this court referred the case to the United States Bankruptcy Court for the Eastern District of Pennsylvania, indicating that “it appear[ed] that this matter would constitute a ‘core proceeding' . . . [or a]t a minimum, [that] this matter [wa]s related to the bankruptcy proceeding [then] pending in the Bankruptcy Court.” July 12, 2017 Order at 1, n.1, Artesanias Hacienda Real S.A. de CV v. North Mill Capital, LLC, et al., Civ. A. No. 16-4197, Doc. No. 79 (internal citations omitted). Leisawitz Heller then sought a writ of mandamus from the Third Circuit, arguing that the case was properly before this court, because bankruptcy court jurisdiction did not exist. Petition for Writ of Mandamus, Doc. No. 6-36. North Mill filed an answer to the petition, arguing in support of the writ's issuance. Answer to Pet. for Writ of Mandamus, Doc. No. 6-37. AHR filed an opposition, arguing that Leisawitz Heller did not meet the standard for a writ of mandamus and should be estopped from arguing that bankruptcy jurisdiction did not exist because it had previously taken the opposite position before this court. Opp. of Resp't Artesanias Hacienda Real S.A. de C.V. to the Pet. of Leisawitz Heller for Writ of Mandamus, In re: Leisawitz Heller, No. 17-2710 (3d Cir.).[5] The Third Circuit seemingly agreed, entering an order on August 7, 2017, stating only that “[t]he foregoing petition [wa]s denied.” Special App. at ECF p. 53, Doc. No. 6-1.[6]

         The matter then moved forward in the United States Bankruptcy Court for the Eastern District of Pennsylvania. The Honorable Jean K. FitzSimon dismissed the amended complaint on December 6, 2018. Bankr. Ct. Op. at 1, Doc. No. 1-1.[7] First, Judge FitzSimon held that the bankruptcy court had core jurisdiction “[b]ecause this matter involves a matter concerning the administration of the estate, or a proceeding affecting the liquidation of the assets of the estate . . . .” Id. at 1 n.1 (citing 28 U.S.C. § 157(b)(2)(A), (O)). Second, she held that AHR lacked standing to assert the claims, because “[a]ll of the Debtor's creditors were affected by the alleged collusion, ” and therefore it was for the trustee to bring any applicable causes of action. Id. at 5, 7.

         AHR appealed the decision on December 21, 2018, challenging the bankruptcy court's holdings that bankruptcy court jurisdiction existed over the matter and that AHR lacked standing to bring the claims, as well as the resulting dismissal of the amended complaint. Notice of Appeal at 1, Doc. No. 1-1.[8] AHR filed a brief on February 17, 2019. Doc. No. 6. On March 1, 2019, North Mill filed an emergency motion for an expedited briefing and hearing schedule and a motion to amend the record, seeking to exclude certain materials that AHR had designated in the appellate record-namely, an affidavit from AHR's counsel attaching several exhibits that he had filed with the bankruptcy court without leave ten days before oral argument-or alternatively, to supplement the record with additional materials-namely, AHR's opposition to Leisawitz Heller's petition for a writ of mandamus before the Third Circuit. Doc. No. 7. AHR filed a response in opposition to this motion on March 4, 2019. Doc. No. 9. The court held oral argument on the emergency motion on March 20, 2019, during which the parties agreed to the entry of an order in which (1) the court would strike AHR's counsel's affidavit from the appellate record, but the court would not strike the attached exhibits to the extent they were elsewhere in the record; and (b) the court would supplement the appellate record with AHR's opposition brief filed in the mandamus action. Order at 1-2, Doc. No. 12. The court also set deadlines for AHR to file an amended brief, substituting citations to the affidavit exhibits with citations to those documents elsewhere in the record, as well as for North Mill and Leisawitz Heller to file reply briefs. Id. at 2.

         AHR filed its amended brief on March 25, 2019. Doc. No. 14. Leisawitz Heller and North Mill filed separate briefs in response on April 26, 2019. Doc. Nos. 16, 18. AHR filed replies in further support of its appeal on May 10, 2019, arguing as to North Mill that its brief should be stricken for failure to comply with the formatting requirements of Rule 8015 of the Federal Rules of Bankruptcy Procedure. Doc. Nos. 19, 20. North Mill filed a motion for leave to file a corrected appellee's brief to fix the formatting issues, which the court granted as unopposed on June 5, 2019. Doc. Nos. 22, 24. North Mill filed a corrected brief on June 5, 2019. Doc. No. 25. AHR also filed a “request to take judicial notice of proceedings in the bankruptcy court, ” relating to the transcript of a May 7, 2019 hearing before Judge FitzSimon, Doc. No. 21, to which Leisawitz Heller filed an opposition. Doc. No. 23. This matter is now ripe for resolution.


         A. Standard of Review

         Generally, on appeal from a final order entered by a bankruptcy court, the district court reviews the order using the traditional standards of review: Regarding the bankruptcy court's legal conclusions, the district court reviews those conclusions de novo. In re Trans World Airlines, Inc., 145 F.3d 124, 131 (3d Cir. 1998) (citation omitted). The court reviews the bankruptcy court's findings of fact to examine whether they are “clearly erroneous.” Am. Flint Glass Workers Union v. Anchor Resolution Corp., 197 F.3d 76, 80 (3d Cir. 1999) (quoting In re Krystal Cadillac Oldsmobile GMC Truck, Inc., 142 F.3d 631, 635 (3d Cir. 1998)). However, although the bankruptcy decision here was framed as a final order, as discussed below, this court concludes that the bankruptcy court only had “related to” jurisdiction. Therefore, the court conducts a plenary review of all findings in light of AHR's objections and treats all holdings as recommendations, rather than conclusions. See 28 U.S.C. § 157(c)(1) (stating that under “related to” jurisdiction, bankruptcy court “submit[s] proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and reviewing de novo those matters to which any party has timely and specifically objected.”); see also In re Montgomery Ward & Co., Inc., 428 F.3d 154, 160 n.12 (3d Cir. 2005) (“The bankruptcy court makes final decisions in core matters which can be appealed to the district court. But in non-core cases the bankruptcy court can make only recommendations to the district court.”).

         B. Bankruptcy Court Jurisdiction[9]

         AHR first argues that the bankruptcy court lacked jurisdiction over the claims at issue. Am. AHR Br. at 35-40. Bankruptcy courts have jurisdiction over “core” proceedings or matters “related to” a bankruptcy proceeding. In re Resorts Int'l, Inc., 372 F.3d 154, 162 (3d Cir. 2004). In the Third Circuit, courts follow a two-step test to determine whether a claim is a core proceeding. First, the court considers whether the claim falls under the “illustrative list” in 28 U.S.C. § 157(b). Halper v. Halper, 164 F.3d 830, 836 (3d Cir. 1999). If so, the court then applies the core proceeding test: “[A] proceeding is core [1] if it invokes a substantive right provided by title 11 or [2] if it is a proceeding, that by its nature, could arise only in the context of a bankruptcy case.” Id. (alterations in original) (quotation marks and citations omitted).

         Even if a matter does not meet the requirements for core jurisdiction, it is nonetheless “related to” the bankruptcy proceedings if the “proceeding could conceivably have any effect on the estate being administered in bankruptcy.” Id. at 837 (quoting Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984), overruled on other grounds by Things Remembered, Inc. v. Petrarca, 516 U.S. 124 (1995)). A plaintiff's claims “need not necessarily be against the debtor or against the debtor's property” to be “related to” the bankruptcy, so long as they “could alter the debtor's rights, liabilities, options, or freedom of action (either positively or negatively) [or could] in any way impact[] upon the handling and administration of the bankrupt estate.” Pacor, Inc., 743 F.2d at 994; cf. Saul, Ewing, Remick & Saul v. Provident Savings Bank, 190 B.R. 771, 775 (D. Del. 1996) (“Saul”) (“Therefore, disputes between parties other than the debtor generally do not invoke the court's ‘related to' jurisdiction of § 1334 unless the action would have some effect on the bankruptcy estate.” (emphasis added)).

         The fact that a plaintiff commenced the action before the debtor filed for bankruptcy does not foreclose the existence of bankruptcy jurisdiction. See Pacor, Inc., 743 F.2d at 986 (plaintiffs' suit preceded chapter 11 petition); In re United Stairs Corp., 176 B.R. 359, 363-64 (Bankr. D.N.J. 1995) (plaintiffs' suit preceded chapter 7 petition). Indeed, Federal Rule of Bankruptcy Procedure 9027 explicitly provides for removal to the Bankruptcy Court of “civil action[s] initiated before commencement of the case under the [Bankruptcy] Code.” Fed.R.Bankr.P. 9027(a)(2) (emphasis omitted). The court considers all claims separately to determine whether bankruptcy jurisdiction exists over each claim. See Halper, 164 F.3d at 839 (adopting “claim-by-claim approach” to assessing bankruptcy jurisdiction).

         AHR brought six claims against North Mill and Leisawitz Heller: (1) aiding and abetting breach of fiduciary duties owed AHR as a creditor of insolvent corporation Wilton against North Mill; (2) the same claim against Leisawitz Heller; (3) conspiracy to breach fiduciary duties owed insolvent corporation Wilton and its creditor AHR against both defendants; (4) fraudulent transfer against both defendants; (5) conspiracy for fraudulent transfer against both defendants; (6) conspiracy to engage in the commercially unreasonable disposition of the Debtor's assets against both defendants. First Am. Compl. at ¶¶ 66--147. The court assesses each claim separately for jurisdictional purposes. Harper, 164 F.3d at 839.

         1. Breach of Fiduciary Duty and Conspiracy to Breach Fiduciary Duty Claims

         Courts disagree about whether breach of fiduciary duty claims fall under a bankruptcy court's core jurisdiction or are more appropriately treated as “related” claims. In In re South Canaan Cellular Investments, LLC, the court held that core jurisdiction existed over the debtor's claims that a creditor aided and abetted its shareholder's breach of fiduciary duty as “part of the claims allowance process that could only occur in this bankruptcy case.” 427 B.R. 85, 92 (Bankr. E.D. Pa. 2010) (citations omitted). The court then found it had “related to” jurisdiction over the debtor's breach of fiduciary claims against its shareholder, because “the relief requested include[d] a demand for damages and for equitable relief that, if successful, would increase the assets of the bankruptcy estate available for distribution.” Id. at 92 (citing Matter of Delaware & Hudson Ry. Co., 122 B.R. 887, 894-95 (D. Del. 1991); In re Jamuna Real Estate, LLC, 357 B.R. 324, 336 (Bankr. E.D. Pa. 2006)).

         In contrast, the Bankruptcy Court for the District of Delaware held in In re Allied Systems Holdings, Inc., “[i]ndeed, the overwhelming majority of courts in this district and other districts conclude that breach of fiduciary claims do not involve the application of bankruptcy law, are ordinary state law causes of action, and could proceed outside the bankruptcy court.” 524 B.R. 598, 606 (2015) (footnote omitted). However, the court went on to find that although core jurisdiction did not exist, “related to” jurisdiction allowed the court to hear the claims because “if the [Unsecured Creditors'] Committee is successful on its claims, it could conceivably increase the size of the estate.” Id. at 607 (footnote omitted); see also In re Zhejiang Topoint Photovoltaic Co., Ltd., No. 14-24549 (JNP), 2017 WL 6539481, at *3 (Bankr. D.N.J. 2017) (holding that core jurisdiction did not apply to breach of fiduciary duty claims because action did not arise under Chapter 11, but “related to” jurisdiction existed because success on claims “would result in a larger distribution to creditors”); In re Domiano, 422 B.R. 497, 500 (Bankr. M.D. Pa. 2009) (holding, without explanation, that “related to” jurisdiction existed over debtor's breach of fiduciary duties claims against creditor); In re Jamuna Real Estate, LLC, 357 B.R. at 336 (“While the Third Circuit has not had occasion to decide whether such claims are core or not, the majority of courts which addressed the question have held that a cause of action for breach of fiduciary duty is a non-core, related proceeding.” (collecting cases)).

         This court likewise follows that approach and deems the breach of fiduciary duty and related aiding and abetting claims to be related, non-core claims. Although the claims are not listed under § 157(b), do not invoke a substantive right under Title 11, and are not the sort of claims that could only arise in the context of a bankruptcy case, as explained further below, the damages AHR seeks would belong to the estate, and therefore increase the pool of assets available to satisfy the outstanding liabilities owed to all creditors.

         2. Fraudulent Transfer Claims

         AHR asserts fraudulent transfer and conspiracy to commit fraudulent transfer claims under the Pennsylvania Uniform Fraudulent Transfer Act (“PUFTA”). First Am. Compl. at ¶¶ 102-134. Essentially, AHR asks the court to avoid the purportedly fraudulent transfer, either by invalidating North Mill's lien or by awarding damages commensurate with the value of the transferred property.

         A bankruptcy trustee may “avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under” other sections of the Bankruptcy Code. 11 U.S.C. § 544(b)(1).[10] This “allows the bankruptcy trustee to stand in the shoes of an actual creditor who may avoid a transfer under applicable nonbankruptcy law, ” including the PUFTA. In re Polichuk, 506 B.R. 405, 417 (Bankr. E.D. Pa. 2014) (citation and footnote omitted); see also In re Int'l Auction and Appraisal Servs. LLC, 493 B.R. 460, 463 (Bankr. M.D. Pa. 2013) (“Section 544 enables a trustee to use state law to avoid any transfer that an unsecured creditor could have avoided outside of bankruptcy.”); In re Titus, 467 B.R. 592, 600 (Bankr. W.D. Pa. 2012) (“The fraudulent transfer action includes three counts and is pursued pursuant to Pennsylvania state fraudulent transfer law via 11 U.S.C. § 544(b)(1).”), vacated in part on other grounds, Titus v. Shearer, 498 B.R. 508 (W.D. Pa. 2013).

         In In re Rosenblum, the court held that “related to” jurisdiction applied to ...

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